Does Appraisal Determine the Method of Repair?

My bet is that virtually all property insurance adjusters will say “yes.” Yet, in a recent Order in a pending case in Wisconsin,1 State Farm has currently won an argument that the method of repair is a coverage issue and not an issue for an appraisal panel.

The Order states the facts leading to a demand for appraisal:

Plaintiffs and State Farm retained separate qualified contractors to estimate the cost of the repair to the fire-damaged dwelling. On April 6, 2021, State Farm advised Plaintiffs that its contractor estimated that the cost of repair was $54,692.48. Id. ¶ 12. On April 21, 2021, Plaintiffs disputed the amount of loss and provided an estimate in the amount of $159,019.06. After another round of estimates, State Farm revised its amount of loss estimate to $72,166.96 on June 22, 2021. On July 30, 2021, Plaintiffs provided State Farm with an updated estimate of loss of $156,993.49 plus $8,373.63 for debris removal. They also provided a signed proof of loss for the dwelling policy limits including the five percent increased limit for debris removal and for 12 months of lost rent at a rate of $850 per month. The difference between State Farm’s estimate and Plaintiffs’ estimate is close to $85,000.

The fire is covered. The cost to fix the fire-damaged property is disputed. The differences seem to be the typical type of case that routinely is referred to appraisal panels throughout the country to put the difference of value to rest and avoid litigation. But State Farm has a different view.

For example, State Farm argued this in part of its briefing:

The parties have competing estimates that differ not only in their valuation of certain items but also as to the scope of damages. Specifically, the parties have forty-one disagreements regarding scope and four that concern valuation. State Farm contends that only the valuation disputes are proper for appraisal. Plaintiffs, on the other hand, argue that the entire dispute should be resolved by the appraisal panel.

However, recent Wisconsin case law, both state and federal, makes clear that appraisal should only cover disputes of valuation and that issues of scope are beyond this determination.

The term “scope of damage” is ambiguous. It can mean the proper method of how to repair the damage. It can also mean the amount of damage caused by a peril. To be clear, State Farm seems to be arguing that both the method of the repair and the amount of damage are not proper for appraisal panels to consider.

The judge agreed with State Farm, holding in part:

Under the plain language of the policy at issue in this case, the appraisal process is limited to circumstances where the insurer and insured disagree as to the ‘amount of loss,’ or the valuation of loss, not the scope or extent of damage and the method of repair.

If this holding stands, appraisal will not exist in Wisconsin. Insurers and policyholders always have different views on the method to fix damaged property. Ask seven different contractors on an approximately $100,000 fire-damaged building what method they would use to repair the fire-damaged building, and you will get seven different methods. The values may be around the $100,000 figure, but the methods invariably differ along with differing pricing.

The policyholders asked the court to reconsider the decision, noting:

State Farm has never contested coverage for this loss. Both parties agree this was a fire loss. State Farm has never identified any other cause which contributed to the damage claimed by its insureds. There is no motion on file or anticipated which will address coverage under the policy. The only dispute between these parties is over the cost to repair the fire damage. This is precisely the type of factual dispute an appraisal panel is meant to resolve. Instead, under the current ruling, the Higgins are now forced to incur the time and expense to have a jury decide the amount of loss.

There is no basis for State Farm or this Court to conclude an appraisal panel would be asked to determine coverage on this claim. State Farm identified 41 ‘scope’ differences between the parties’ estimates and argued that ‘a disagreement of scope implicates coverage because resolution of scope disagreements necessarily entails an interpretation of whether an item suffered ‘accidental direct physical loss’ sufficient to trigger coverage under the State Farm Policy.’ This is a gross mischaracterization of the facts and the policy which the Court relied upon to reach its conclusion.

Out of 41 scope differences, State Farm agreed 32 involved some measure of accidental direct physical loss. The dispute over most of these items is whether the particular unit of property—i.e., window, door, flooring, trim, etc.— could be cleaned or refinished, or if it had to be removed and replaced; not whether it sustained accidental direct physical loss. The remaining items largely involve ancillary work related to those items which have already been confirmed damaged by fire. For example, if a window had to be removed and replaced (as asserted by the insured) rather than cleaned (as asserted by State Farm), there might be additional necessary work such as installing window wraps, trim and sill flashing. (Id. at 33.) Again, these were not differences in coverage—i.e., whether a covered cause of loss caused accidental direct physical loss to the property—but rather a dispute over the cost to repair the undisputed damage from a fire. While the Court was correct in holding that coverage disputes are outside the purview of an appraisal panel, it was incorrect in adopting State Farm’s unsupported assertion that a coverage issue existed in this claim. This is a manifest error of fact which supports reconsideration.

This case is another example of how State Farm does not pay appraisal awards, as noted in my post,
Why Has State Farm Stopped Paying Appraisal Awards? Assuming the panel hypothetically reached an agreement on all the items, State Farm would take the disputed 41 items and remove them from payment claiming that those were “coverage” items. If this ruling is upheld, such a step by State Farm would be seemingly correct because those disputed items would have to be resolved through court proceedings.

There is another lesson from this case. State laws differ on the appraisal process. Therefore, it is important to know the rules for each state. Since the rules can change, as shown by this case, appraisers and adjusters need to stay educated on the current state appraisal law where the appraisal is being conducted.

Our justice system allows parties to challenge how they view the proper interpretation of insurance policies. While many of us may disagree with State Farm’s view, it certainly is entitled to have its day in court and a fair analysis of its position.

This is an important property insurance law and appraisal case. I will keep readers abreast of future developments.

Thought For The Day

We meet aliens every day who have something to give us. They come in the form of people with different opinions.
—William Shatner
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1 Higgins v. State Farm Fire & Cas. Co., (E.D. Wis. July 5, 2022).
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